In previous blogs, we have looked at potential changes to trading desk structure and definition under the Fundamental Review of the Trading Book (FRTB) in comparison to the Volcker Rule. FRTB also has a significant impact on trading accounts for trading desks.

Under the Volcker Rule, the trading account is defined as a statutory concept to identify transitions that are subject to the final rule’s restrictions on proprietary trading. Under Volcker, therefore, trading accounts are not identified as such if the account aligns with the trading book or banking book within the bank.1 FRTB, however, clearly defines a boundary that governs trading book instruments as well as their purpose and interaction (for example, for internal risk transfer) between a regulatory trading account and the banking book.2

This may result in a medium-to-high degree of change for trading desks, as the Volcker Rule does not define a strict boundary for trading and/or banking books.3 Under FRTB, however, the trading account and trading desks would need to be re-evaluated against the guidelines, with instruments that are required to be classified within the trading desk – such as those used for market making, underwriting, risk mitigating hedging, and other permitted proprietary trading activities –strictly defined.4

In addition, Volcker and FRTB define financial instruments differently. The Volcker definition of financial instrument encompasses securities (including options), derivatives (including options), a contract for sale of a commodity on future delivery or options on such a contract, but excludes loans, specific commodities, and foreign exchange.5 In comparison, FRTB defines financial instruments to include foreign exchange and commodities as well as any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. Financial instruments include both primary Financial Instruments (or cash instruments) and derivative Financial Instruments.6

Under FRTB, a financial asset is any asset that is cash, the right to receive cash or another financial asset or a commodity, or an equity instrument, and a financial liability is the contractual obligation to deliver cash or another financial asset or a commodity. Commodities under FRTB also include non-tangible (that is, non-physical) goods.7

Volcker and FRTB rules will coexist in the near future and banks should enhance their compliance programs to address both sets of rules. In the next two blogs in this series we will look at actions banks can take to achieve this objective.

This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.

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Accenture, its logo, and High Performance Delivered are trademarks of Accenture. This document is produced by Accenture as general information on the subject. It is not intended to provide advice on your specific circumstances.

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